Tax Wealth but not the Warren Way

Directly
taxing wealth holdings is appealing in part because the rich keep getting
richer. In 1986, the top one
percent owned 25 percent of the nation’s wealth. Now it is about 40 percent.

Surveys show that most people believe that the system is rigged
to serve the rich. It is not surprising that a majority of likely voters
support presidential hopeful Elizabeth Warren’s proposal to tax households with
a net worth exceeding $50 million.

Her proposed
tax is an inelegant and probably unworkable solution to a serious problem. The
Warren wealth tax would be difficult to administer, it would be imposed without
regard to the actual returns on assets during the year, and is based on the
dubious proposition that households with a net worth exceeding $50 million
should be taxed but those with $40 million should not.

Taxing income
from wealth is easily accomplished within the existing income tax code. Some legal authorities question whether a direct
tax on wealth is constitutional.

Senator
Warren is keen on taxing fine art collections, expensive yachts and other toys
of the super-rich. New funding for the
IRS will be required if these hard to value assets are to be taxed.

We do not
need a special tax to reduce wealth inequality.
Well-designed taxes on capital income and inheritance can achieve this
goal.

Long-term
capital gains and dividends receive favorable treatment under the tax code. The
Joint Committee on Taxation estimates that these tax breaks on income from
wealth amounted to $133 billion in 2017.

The Net
Investment Income (NII) tax is currently a 3.8 percent surtax on income from
wealth. Capital gains, interest,
dividends, income from rental property, and capital gains distributions from
mutual funds are subject to the NII. Tax
returns for married couples filing jointly reporting capital income from these
sources and having an adjusted gross income over $250,000 are subject to this
levy.

Progressively
increasing the NII tax rate can achieve any desired increase in wealth taxation.
In addition, it does not require more of our taxes to fund the IRS.

Fixing the
inheritance tax is also required. Three
children of Sam Walton are reported to be worth $45 billion. Imposing some limits on the intergenerational
transfer of great fortunes can reduce wealth inequality without imposing the high
costs of compliance that will accompany Senator Warren’s proposal.

There is concern among some
economists that taxing wealth will have a negative impact on investment. Lower wages and reduced employment under this
scenario would aggravate the trend of rising income inequality.

To the
extent that most wealthy households are not active entrepreneurs, this concern
is exaggerated.

Senator
Warren’s proposal is inadequate because it arbitrarily imposes the net worth
tax on households with $50 million or more in assets. It is not a serious attempt to tax
wealth. Targeting the super-rich is a
symbolic effort that has widespread political appeal. Her proposal imposes
heavy compliance costs that will only add to the IRS bureaucracy.

An equitable and efficient wealth tax will focus on the income from assets. Reconsidering current tax breaks on dividends and capital gains, coupled with a progressive Net Investment Income tax, can create an equitable and efficient tax on wealth.

David W. Rasmussen is an economist and Dean Emeritus of the College of Social Science and Public Policy at Florida State University.